ANWR, OCS, And “Supply and Demand”
Supply and demand are a relationship by which market prices are set in a successful business. It is the most basic, day one, concept of economics. Just knowing that increased supply and demand decreased can lower prices for a product is not going to get you your masters in economics. As a matter of fact it is about as close to it as a guy who masturbates is to getting a doctorate MD. There is so much more to it then that. I will try to explain its relationship to oil.
Like I said, supply and demand are a relationship. One must respect the other when trying to determine affects on the market. Demand is a factor that reduces in quantity as price is increased. A key element of demand is the phrase “willing and able”. Bata VCRs are not flooding the shelves of you local Wal-Mart because nobody is willing to buy them at any price. Any supplies of Betas are dead inventory. By the same token there are only about 50 Koenigsegg CCRs produced per year. It turns out that there are very few people “able” to pay 3/4 of a million dollars for a car. (It doesn’t have the greatest fuel economy either.) Many are willing but not able.
The demand for oil is increasing. China is estimated to put 25,000 cars on the road per year. It is also estimated that they will have more cars on the road then the US in the next 10 years. India is another emerging economy. It is not sure what pressure they will put on the auto market, but the energy market in general will feel the upward push in demand. So, Why not just throw supply at it?
Let us take a look at supply. Supply is the amount that the producer has decided the market will buy at the maximum price. That point where the market is satisfied and doesn’t need anymore is “one too many”. It is also called it equilibrium point. If 20 people want your product and you produce 10, then the price you can ask will be more. The 10 that get it will be the 10 most “willing and able.” The other 10 will do without.
Anything produced falls into two categories. Some fall into both. Every product is at least either a Luxury or a necessity. You need a home. Anything above a warm dug out hole in the ground is considered a luxury. Almost all products have “substitute goods”. Butter has margarine, corn has peas, and beer has wine. Gasoline has substitute products, however, they are very undesirable to most transportation energy consumers. Its substitutes are E85, natural gas, walking, biking, and renewably generated electrical energy are most notable. Many of these options are not even feasible for most consumers. To further complicate the situation, the American culture is designed in such a way that using gasoline is required as a way to continue prosperity. If you are not able to pay for gasoline, you are not going to work, and you are not going to be able to for necessities, let alone luxuries for very long.
In contrast, the Saudi Arabian culture is not as tied to the use of gasoline. They actually produce way more oil then consume. Oil in the ground is like money in the bank for them. Their economy is positively affected by oil price increases. Drilling in ANWR will not change the economic equilibrium price. That point where maximum price is charged for the least quantity produced. That just means that if one supplier increases supply, a second producer can actually maintain its bottom line by simply reducing supply. This is especially true if your are predominantly a supplier and not a consumer of the product. Saudi Arabia’s economy is positively effected by increases in prices on crude oil. The US economy is not.
This is why supply and demand argument doesn’t hold weight in our economy. Getting off the stuff does.